Firm s Constraints in Bolivia

Firm’sConstraints inBolivia: DoesFirm SizeMatter?MotivationIntroduction &BackgroundStylized Factsfor BoliviaEmpiricalStrategyResultsRemarks

Firm’s Constraints in Bolivia: Does Firm SizeMatter?

José P Mauricio Vargas

ARU Foundation

July 2011


Motivation

Firms are the primary unit of the production process. Iffirms do well...

Doing Business in Bolivia is not an easy issue.

"In the past five years, about 85 percent of the world’seconomies have made it easier for local entrepreneurs tooperate, through 1,511 improvements to businessregulation. Doing Business 2011 pioneers a new measureshowing how much business regulation has changed in 174economies since 2005. China and India are among the top40 most-improved economies. Among the top 30most-improved economies, a third are from Sub-SaharanAfrica." doing business 2011 report

Bolivia is ranked in the 149 position of 186 economies.Bolivia is the second worst country of South America(after Venezuela). Colombia and Peru are the best rankedones: Peru (36) and Colombia (39).


Motivation



"In the past five years, about 85 percent of the world’seconomies have made it easier for local entrepreneurs tooperate, through 1,511 improvements to businessregulation. Doing Business 2011 pioneers a new measureshowing how much business regulation has changed in 174economies since 2005. China and India are among the top40 most-improved economies. Among the top 30most-improved economies, a third are from Sub-SaharanAfrica." doing business 2011 reportBolivia is ranked in the 149 position of 186 economies.

Bolivia is the second worst country of South America(after Venezuela). Colombia and Peru are the best rankedones: Peru (36) and Colombia (39).


Motivation



"In the past five years, about 85 percent of the world’seconomies have made it easier for local entrepreneurs tooperate, through 1,511 improvements to businessregulation. Doing Business 2011 pioneers a new measureshowing how much business regulation has changed in 174economies since 2005. China and India are among the top40 most-improved economies. Among the top 30most-improved economies, a third are from Sub-SaharanAfrica." doing business 2011 reportBolivia is ranked in the 149 position of 186 economies.Bolivia is the second worst country of South America(after Venezuela). Colombia and Peru are the best rankedones: Peru (36) and Colombia (39).


Motivation

So, Do firm’s characteristics (in this case ‘size’) implydifferent obtacle levels?

Which are the main obstacles that small firms (typicalsmall entrepreneurs) face?


Introduction & Background

Our revision found evidence of the relationship between:


Introduction & Background / From Constraints tothe Decision of Being an Entrepreneur

Regulations—>IndividualCharacteristics—>Entrepreneurship [Probit, IV-probit /37countries] (Ardagna and Lusardi, 2008)

Inheritance & Inheritance size (proxies of liquidityconstraints)—>Entrepreneur [probit /US] (Holtz-Eakin etal., 1994)

Wealth (proxy to liquidity constraints)—> From Wageemployment to Self Employment [probit / Finland](Johansson, 2000).

Wealth—>Entry into Entrepreneurship is flat over themajority of the wealth distribution [US].(Hurst & Lusardi,2004)

Human Capital + Capital Constraints —> Entrepreneurial[Netherlands] (Parker & van Praag, 2005)






























Introduction & Background / From Constraints tothe Firms Performance

Credit Constraints—>Missallocation of resoruces—>FirmProfitability (Greenwald and Stiglitz 1993; Schiantarelli1995)

Firms with Credit Constraints —> Profitability [UsingBalance Sheets for Bulgaria] (Rizov, 2004)

Structural Constraints (internet use, financial)—>Probability to succeed [Ordered Probit Model / Chile](Halabí and Lussier, 2010)












Introduction & Background / Can Constraints beendogenous?

Asymmetric Information—>Lending Contract —>BorrowingConstraints [Theoretical Model] (Clementi andHopenhayn, 2006)

Ownership Status —> Probability of Being FinanciallyConstrained [Panel Data / Estonian Companies] (Hobdariet al., 2009)

Firm’s age —> Perceived Financing Constraints [Logit /Eurobarometer 25 Countries] (Canton et al., 2010)












Introduction & Background / What About FirmSize as Endogenous Variable?

Firm Level ( Economies of Scale) + Sectoral Level(Network Externalities) + Trends and Structural Changes—> Firm Size [Survey] (Bernardt & Muller, 2000)

Market Size + Capital Intensive Industries + High WageIndustries + R&D + Better Judicial Systems—> Firm Size[15 European Countries] (Kumar et al.,1999)


Introduction & Background / What About FirmSize as Endogenous Variable?

Firm Level ( Economies of Scale) + Sectoral Level(Network Externalities) + Trends and Structural Changes—> Firm Size [Survey] (Bernardt & Muller, 2000)

Market Size + Capital Intensive Industries + High WageIndustries + R&D + Better Judicial Systems—> Firm Size[15 European Countries] (Kumar et al.,1999)


Introduction & Background / What About FirmSize as Exogenous Variable?

Larger Firms—> More R&D—>Growth [8 EuropeanCountries] (Pagano and Schivardi,2003)


Introduction & Background / Firm Size —> Firm’sConstraints

Firm Size —> Financial/Credit Constraint [Probit forHaving a Loan / Brazil](Kumar and Francisco,2005)

Firm Size + Ownership Structure + InstitutionalDevelopment —> Financing Contraints [Ordered Probit /WBES for 16 African Countries] (Kounouwewa and Chao,2011)

Firm Size —> Financial/Legal/Corruption Constraints[WBES for 54 countries] (Beck et al., 2005)












Introduction & Background / Firm’s Constraints—> Firm Size

Financial Constraints —> (-) Firm Size [WBES for Italy](Angelini and Generale,2005)

Liquidity Constraints —> (-) Firm Size [Panel Data forManufacture Sector in Italy] (Fagiolo and Luzzi, 2006)

Financial Constraint —> Firm Size Distribution[Theoretical—> using intertemporal optimization and atwo-period model] (Cooley and Quadrini, 2001; and Cabraland Mata, 2003)












Stylized Facts for Bolivia

The most conflictive elements: Political Instability,Corruption, Practices of Competitors in the InformalSector and Macroeconomic Instability.



Level of Obstacle of MACROECONOMIC INSTABILITYto the functioning of the establishment (Proportions offirm with ‘No Obstacle’(Left) and ‘Major and SevereObstacle’(Right))



Level of Obstacle of POLITICAL INSTABILITY to thefunctioning of the establishment (Proportions of firm with‘No Obstacle’(Left) and ‘Major and Severe Obstacle’(Right))



Level of Obstacle of CORRUPTION to the functioning ofthe establishment (Proportions of firm with ‘No Obstacle’(Left) and ‘Major and Severe Obstacle’(Right))



Level of Obstacle of INADEQUATELY EDUCATEDWORKFORCE to the functioning of the establishment(Proportions of firm with ‘No Obstacle’(Left) and ‘Majorand Severe Obstacle’(Right))


Empirical Estrategy

Our research objective looks for evidence to support, ifmiddle-class small entrepreneurs are subject to moreintense or less intense constraints from the followingsources of obstacles: Infrastructure and Services;Transport; Informal Sector Practices; Access to Land;Crime; Access to Finance; Government Relations (Taxrates; Tax administration; Business Licensing and Permits;Political Instability; Corruption; Courts); LaborRegulations.


Empirical Estrategy - The Data

We use the 2006 Bolivian Enterprise Survey databasepublished by the World Bank. It contains 613 observationsat firm level ( World Bank, 2007) from enterprises locatedin the three major cities of Bolivia: La Paz, Cochabambaand Santa Cruz. The strata for Enterprise Surveys are firmsize, business sector, and geographic region within acountry.


Empirical Estrategy - The Model

Y ∗1 = α(X1 Y2

)+ e1 (1)

y1,i =

0 if y ∗1.i ≤ γ11 if γ1 < y

∗1.i ≤ γ2

2 if γ2 < y∗1.i ≤ γ3

3 if γ3 < y∗1.i ≤ γ4

4 if γ4 < y∗1.i

(2)

l (α,γ) =N

∑i=1

4

∑j=0log (Pr (y1,i = j |x1,i , y2, α,γ)) ·1 (y1,i = j)

(3)


Empirical Estrategy - The Model considering apotential endogenous regressor

l (β, δ) =N

∑i=1

2

∑h=0

log (Pr (y2,i = h|x1,i , x2,i , β, δ)) · 1 (y2,i = h)

(4)

We estimate the two-equation model (which consists in anIV ordered probit with and ordinal endogenous regressor).If the correlation coeficient is statistically distinct fromzero, there is evidence of endogeneity.


Empirical Estrategy - The Model considering apotential endogenous regressor

Our set of control variables (X1) includes: productionsector, city, firm´s current legal status, percent of the firmdoes the largest shareholder own, principal owner gender,origin of the investment financing needed to start thestablishment, years of experience of the top manager,international-recognized quality certification status.

In the other hand, our potential instruments, or excludedvariables (X2), for the firm size (Y2) are: the stablishmentbelongs to a larger firm, full time employees when thestablishment started operations, legal status of the firmwhen it started operations, age of firm.


Results

Some initial results for only one obstacle:

OBSTACLES

REGRESSORSCoef. Pvalue Coef. Pvalue

Firm Size= Medium 0.497 0.01 0.559 0.03Firm Size = Large 0.815 0.00 0.912 0.05City= La Paz 0.326 0.04 0.314 0.04Legal Status= Publicly listed shareholding company (open) 1.046 0.10 1.040 0.10Legal Status = Limited liability company by quotas 0.730 0.00 0.743 0.00Legal Status = Sole proprietorship 0.497 0.07 0.531 0.10Principal Owner Gender= Female 0.356 0.05 0.349 0.04Years Experience Top Manager 0.015 0.04 0.015 0.03

/cut_1_1 0.320 0.30 0.275 0.47/cut_1_2 0.226 0.47 0.270 0.48/cut_1_3 1.183 0.00 1.227 0.00/cut_1_4 2.242 0.00 2.285 0.00Athrho 0.042 0.82

Inadequately EducatedWorkforce

OProbit IVOProbit

Table 2. Model Estimations.


Results

Some initial results for only one obstacle:

Pr (Y1=0) Pr (Y1=1) Pr (Y1=2) Pr (Y1=3) Pr (Y1=4)

Variable dy/dx dy/dx dy/dx dy/dx dy/dx

(a) Firm Size= Medium 0.129* 0.054** 0.017 0.114** 0.053

(a) Firm Size = Large 0.162* 0.098* 0.042 0.172* 0.130**

(a) City= La Paz 0.089 0.034** 0.017 0.075** 0.031**

(a) Legal Status= Publicly listed shareholding company (open) 0.179* 0.124 0.091 0.195* 0.198

(a) Legal Status = Limited liability company by quotas 0.195* 0.074** 0.031 0.163* 0.075**

(a) Legal Status = Sole proprietorship 0.131** 0.053 0.019 0.113 0.051

(a) Principal Owner Gender= Female 0.102 0.035 0.024 0.081 0.031**

Years Experience Top Manager 0.004** 0.002 0.001 0.004 0.001

Pro b ab ilit y 0.20 0.18 0.36 0.21 0.04

(a) dy/dx is for discrete change of dummy variable from 0 to 1

* 5% of significance; ** 1% of significance

Table 3. Partial Effects for Distinct Probabilities of theStructural Equation.


Remarks

Bolivia does not count on public policy oriented to thefirms’improvement.

The paper attempts to identify which kind of firms faceworse obstacles.In this context, we try to identify if differences in firm’ssize imply differences in the perceived obstacles.We found enough evidence to consider a potentialendogeneity between firm’s size and firm’s constraints.We use a novel estimation method to detect endogeneityproblems in a model with an ordinal endogenous variablewith an ordinal endogenous regressor.The results suggests that firm size is important and coulbe affecting the level of obstacles that firms face.Based in the results, the public policies oriented to firms’improvement should take into account the firm’s size.


Remarks

Bolivia does not count on public policy oriented to thefirms’improvement.The paper attempts to identify which kind of firms faceworse obstacles.

In this context, we try to identify if differences in firm’ssize imply differences in the perceived obstacles.We found enough evidence to consider a potentialendogeneity between firm’s size and firm’s constraints.We use a novel estimation method to detect endogeneityproblems in a model with an ordinal endogenous variablewith an ordinal endogenous regressor.The results suggests that firm size is important and coulbe affecting the level of obstacles that firms face.Based in the results, the public policies oriented to firms’improvement should take into account the firm’s size.


Remarks

Bolivia does not count on public policy oriented to thefirms’improvement.The paper attempts to identify which kind of firms faceworse obstacles.In this context, we try to identify if differences in firm’ssize imply differences in the perceived obstacles.

We found enough evidence to consider a potentialendogeneity between firm’s size and firm’s constraints.We use a novel estimation method to detect endogeneityproblems in a model with an ordinal endogenous variablewith an ordinal endogenous regressor.The results suggests that firm size is important and coulbe affecting the level of obstacles that firms face.Based in the results, the public policies oriented to firms’improvement should take into account the firm’s size.


Remarks

Bolivia does not count on public policy oriented to thefirms’improvement.The paper attempts to identify which kind of firms faceworse obstacles.In this context, we try to identify if differences in firm’ssize imply differences in the perceived obstacles.We found enough evidence to consider a potentialendogeneity between firm’s size and firm’s constraints.

We use a novel estimation method to detect endogeneityproblems in a model with an ordinal endogenous variablewith an ordinal endogenous regressor.The results suggests that firm size is important and coulbe affecting the level of obstacles that firms face.Based in the results, the public policies oriented to firms’improvement should take into account the firm’s size.


Remarks

Bolivia does not count on public policy oriented to thefirms’improvement.The paper attempts to identify which kind of firms faceworse obstacles.In this context, we try to identify if differences in firm’ssize imply differences in the perceived obstacles.We found enough evidence to consider a potentialendogeneity between firm’s size and firm’s constraints.We use a novel estimation method to detect endogeneityproblems in a model with an ordinal endogenous variablewith an ordinal endogenous regressor.

The results suggests that firm size is important and coulbe affecting the level of obstacles that firms face.Based in the results, the public policies oriented to firms’improvement should take into account the firm’s size.


Remarks

Bolivia does not count on public policy oriented to thefirms’improvement.The paper attempts to identify which kind of firms faceworse obstacles.In this context, we try to identify if differences in firm’ssize imply differences in the perceived obstacles.We found enough evidence to consider a potentialendogeneity between firm’s size and firm’s constraints.We use a novel estimation method to detect endogeneityproblems in a model with an ordinal endogenous variablewith an ordinal endogenous regressor.The results suggests that firm size is important and coulbe affecting the level of obstacles that firms face.

Based in the results, the public policies oriented to firms’improvement should take into account the firm’s size.


Remarks

Bolivia does not count on public policy oriented to thefirms’improvement.The paper attempts to identify which kind of firms faceworse obstacles.In this context, we try to identify if differences in firm’ssize imply differences in the perceived obstacles.We found enough evidence to consider a potentialendogeneity between firm’s size and firm’s constraints.We use a novel estimation method to detect endogeneityproblems in a model with an ordinal endogenous variablewith an ordinal endogenous regressor.The results suggests that firm size is important and coulbe affecting the level of obstacles that firms face.Based in the results, the public policies oriented to firms’improvement should take into account the firm’s size.

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Firm s Constraints in Bolivia